United Illuminating parent company’s acquisition of three New England natural gas companies offers the Connecticut utility the potential for high return as an enormous energy provider in the state. But the strategy is so controversial it caused a member of the company’s Board of Directors to resign and its stock price to plummet 10 percent.
“If we thought we couldn’t process this transaction, we wouldn’t do it,” said Anthony Vallillo, United Illuminating president and chief operating officer.
Questions about how exactly an the parent company of an electric utility with a 2009 net income of $59 million spends $1.3 billion to acquire two Connecticut and one Massachusetts gas companies with a 2009 net income of $38 million are the reason UIL Holdings Corp. has created so many Doubting Thomases.
Former board of director member Marc Breslawsky resigned on May 22 saying the acquisition would result in unacceptable debt leverage and shareholder dilution. The purchase proposal calls on UIL to issue about $500 million in common equity.
Market analyst Standard & Poor’s revised its outlook of UIL Holdings from stable to negative. The S&P report from May 25 — the day the purchase agreement was announced — said S&P will lower United Illuminating’s credit rating to the lowest possible acceptable investment ranking if the company doesn’t finance the deal in a balanced manner.
After the purchase agreement with Iberdola USA, Inc. was announced on May 25, the UIL stock price dropped by more than 10 percent to near $24 per share, and trading continued at that level the following day.
The company didn’t expect such a large drop in its public value, Vallillo said, but once the company successfully pulls off the acquisition, he predicts the stock price should return to its previous levels.
UIL Holdings Corp. expects to complete the acquisition by April 2011. With a cash payment of $885 million and debt retention of $411 million, the company will own the Southern Connecticut Gas Company, the Connecticut Natural Gas Corporation and the Berkshire Gas Company in Massachusetts.
The move will more than double the customer base to 694,000 and bring the total number of towns served to 66, including 14 towns in Southwest Connecticut served by both United Illuminating and the Southern Connecticut Gas Co.
“We thought this was an opportunity to really grow our customer base and expand and diversify into another field by offering natural gas in addition to electricity,” Vallillo said.
With the completion of the transaction, all three Connecticut gas companies will be owned by parent companies of electric utilities. Northeast Utilities owns Connecticut Light & Power and the Yankee Gas Services Co.
Connecticut Attorney General Richard Blumenthal already has called for a review of the purchase agreement, wanting to make sure rates, services, employment, wages and benefits are kept at acceptable levels.
The Connecticut Department of Public Utilities will evaluate the sale of the gas companies to make sure UIL Holdings Corp has the financial, managerial and technical capabilities to take on the gas utilities.
Given its prior experience with the DPUC, Vallillo said the company shouldn’t have any trouble getting the necessary administrative approvals to complete the transaction. After all, they are utility companies, even if UIL will be dealing with gas mains instead of power lines.
UIL has a track record of getting the maximum return out of its ratepayer base, Vallillo said. Since gas utilities are a regulated business, the company is guaranteed a certain percentage of profit on its services.
By owning four separate utility companies, UIL creates an opportunity to reduce the administrative and overhead costs associated with running such a company, said Demetrios Giannaros, business professor at the University of Hartford. While the workforce will remain the same for the utilities’ delivery and maintenance, departments like accounting, billing, purchasing and IT can be consolidated for all the UIL companies.
“As long as services are maintained by the company and as long as some degree of quality control is maintained by the Department of Public Utility Control, it can benefit the customers,” Giannaros said.
Because UIL will need more natural gas for its three gas utilities, the company can buy in bulk from the providers in the South and achieve extra savings for customers there as well, Giannaros said. Because natural gas is a regulated utility, UIL’s profits won’t be tied to the cost of natural gas, as it has to pass it onto the customer without any mark-up.
There is a national trend among utility companies to obtain more than one type of energy — such as electric and natural gas — in order to diversify its products.
“Some of these companies will eventually become national,” Giannaros said. “It is good for the customer over the long term. The only question is whether quality and price are maintained at acceptable levels.”
